This week we have been faced with a barrage of economic news and data, including: updates on the Fed’s favourite measure of inflation (the PCE price index), the ISM indices, estimates for first-quarter productivity and unit labour costs, employment and wage data, and an update from the Fed on how it sees things after its FOMC meeting. From what we can glean from the data, the message is quite clear—we are in the late stages of the economic cycle. Demand is still quite strong, and though there has been some deceleration in that strength, at least part of that has been due to capacity constraints and slower delivery times rather than demand weakness. Inflation has reached the Fed’s 2% inflation target and is now cyclically accelerating on the back of the combination of strong demand, still moderately accommodative financial conditions, fiscal stimulus, protectionism, a weaker dollar, and growing capacity constraints on both labour and capital resources. Meanwhile, the unemployment rate at 4.x% is now well below both the Fed’s and the CBO’s estimates of the NAIRU (4.5% & 4.7%, respectively). This leaves us with two questions for this week’s Economics Weekly: 1) Having now reached its targets, can the Fed now declare “mission accomplished”? And 2) based on the Fed’s current expected trajectory for inflation and unemployment against today’s levels, what does this tell us about the end level of interest rates within a Taylor rule-type context?
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.